VIX Call Buying Explodes in Wave Evoking Memories of `50 Cent'

(Bloomberg) -- A big buyer is accumulating protection against a major sell-off in U.S. stocks over the next month.

More than 570,000 call options tied to the Cboe Volatility Index -- known as the market’s “fear gauge” -- have traded as of 2:25 p.m. on Wednesday in New York, compared to less than 50,000 put options. That would leave the put/call ratio at its lowest in more than four years, prior to China’s shock devaluation of the yuan.

The activity is similar to moves by the infamous volatility buyer known as “50 Cent,” so dubbed for the practice of purchasing protection priced at half-a-dollar a piece in considerable size. This player was active throughout 2017, the most tranquil year for U.S. stocks in over 50 years, yet was finally able to reap a massive payday on the trade to the biggest one-day jump in implied equity volatility in history on Feb. 5, 2018. But this type of buying behavior has been seen only sparingly since then.

“The large VIX call buying over the past two days is a definite change of character in the VIX options market in an otherwise sleepy tape,’’ said Patrick Hennessy, head trader at IPS Strategic Capital. “There hasn’t been many of these chunky 50,000-plus contract prints in the VIX space this year, which was a theme that dominated the VIX options market back in 2017 when ‘50 Cent’ was present.’’

Hennessy added that it’s unlikely these options purchases represent a directional bet on equity volatility, and instead likely serve as a protection for a book that’s long risk.

Roughly half of the total calls traded expire in a month’s time with a strike price of 20. The size of these trades implies that a limited number of investors -- perhaps just one -- are using these products to hedge against market mayhem. The size is similar to many of the documented “50 Cent” purchases in 2017 and 2018, if not a little larger, but the cost is around 35 cents a pop. So perhaps this buyer will secure a moniker linked to another member of G-Unit.

The VIX hasn’t touched 20 since May 13, when China’s retaliation to the U.S. tariff hikes elicited a sell-off in stocks. The volatility gauge fell below 12 on Wednesday for the first time in more than three months as the S&P 500 Index climbed to a fresh record.

“Over the past few days we’ve seen big buyers of VIX call options,’’ said Pravit Chintawongvanich, Wells Fargo’s equity derivatives strategist. “It’s especially notable since hedging with VIX call options had kind of gone out of fashion since the 2018 VIX blowup.’’

“I don’t expect much to happen until after the July FOMC decision,” Dave Roberts, an independent trader of volatility products in Washington, said referring to next week’s Federal Reserve meeting.“The problem is, when the market is trending higher as it is now, these known binary outcome events usually fizzle out.’’

Recent market-moving events have typically served to enhance an existing trend rather than spark a reversal, he said. For instance, markets were deteriorating ahead of the U.S. central bank’s December gathering, but on the mend and approaching records before June’s decision and trade talks in Japan.

“The market was basically asleep already near all-time highs,’’ Roberts concluded. “That’s the current environment.’’

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Brendan Walsh

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